A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

To calculate the ROU asset in IFRS 16, start with the initial amount of the lease liability, then: Add the total payments made at or before the lease commencement date. Subtract any lease incentives. Add initial direct costs. Add estimated costs for restoration or removal and disposal.

Multiplying depreciation by the interest rate gets you the total lease payment before sales tax. If you're paying monthly sales tax, you'll multiply that amount by the applicable sales tax rate to get your total lease payment.

A lease liability is the financial obligation for the payments required by a lease, discounted to present value. Under ASC 842, IFRS 16, and GASB 87, the finance lease liability is calculated as the present value of the lease payments remaining over the lease term.

IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

Generally, a money factor of 0.0025 and below (the equivalent of 6% APR) is considered a good rate.

Lease liability – recording it Once we have gathered our information, i.e., we know the lease term, the lease payment and the discount rate, we simply discount the liability over the lease term, using the discount rate. We then record the lease liability, or the resulting amount, on the balance sheet.